The Central Banks Are up to Something

Here’s What They’re Doing [The Daily Reckoning] February 07, 2023 [WEBSITE]( | [UNSUBSCRIBE]( The Central Banks Are up to Something - “Right now the outlook for gold prices in particular is extremely favorable”… - The central banks are putting a floor under the price of gold… - Then Jim Rickards shows you the realities behind the great dollar paradox… [Response Requested 1/1000th of an ounce of gold available for you]( As a The Daily Reckoning reader, Jim Rickards is offering you 1/1000th of an ounce of gold when you upgrade your account. It will come in the form of a “Gold Back” - a new type of gold currency that’s starting to spread across America. If you have not responded to Jim’s offer yet, and want to know how to claim yours… Please click the link below for details. [Learn How To Claim Your Gold Back Currency Now]( En Route to Antarctica February 7, 2023 [Jim Rickards] JIM RICKARDS Dear Reader, In yesterday’s reckoning, I talked about the outlook for oil. In today’s issue, I want to discuss the outlook for gold. Right now the outlook for gold prices in particular is extremely favorable. There are several reasons for this: The first reason is that the dollar price of gold is to a great extent simply the reciprocal of the value of the dollar. If the dollar is strong, gold prices tend to weaken or move sideways. If the dollar is weak, gold prices tend to rally. After a long period of extremely high dollar valuations (and sideways gold prices) the dollar is now losing strength. That accounts in part for the recent rally in gold prices. The second reason involves the geopolitics of Ukraine war financial sanctions. Russia has been largely driven out of the dollar-based payments and reserve systems. In response, Russia has increased the permitted allocation to gold for its sovereign wealth fund from 20% to 40%. If Russia cannot have dollars it will buy gold instead. That policy change allows the sovereign wealth fund to acquire perhaps 100 metric tonnes of physical gold per year to meet the new ceiling. That’s about 2.5% of annual global gold output at a time when gold is already in short supply due to buying by central banks, government mints and institutional investors. This increased demand by Russia will tend to put a floor under the price of gold due to opportunistic buying by Russia. In conjunction with buying by other central banks this constitutes a material tailwind for the dollar price of gold. But it’s not just Russia, of course. Central banks as a whole purchased 399 metric tonnes of gold in the third quarter of 2022. That’s the most gold ever purchased by central banks in a single calendar quarter, and it represents over 1% of all the gold held by all central banks combined. Fourth-quarter data is not yet available. But if that pace continues or increases, it will amount to an increase of over 4% per year in central bank gold reserves. That’s significant. Yet the total global production of gold has been flat for the past six years. That combination of flat output and increasing demand will put upward pressure on gold prices and act as a de facto floor on gold since central banks tend to be opportunistic buyers and will definitely buy if any dips emerge. The fact is there’s a growing movement to move away from dollar reserves because the U.S. has abused financial sanctions to freeze assets including central bank reserves of Russia, Syria, Iran, North Korea, Venezuela and others. They’re working to reduce dollar reserves and invent new forms of currency for international payments. That’s why countries like China, Brazil and India are moving away from dollars for fear that they will be next on the sanctions list. The third reason gold should rise involves the return of stagflation, a combination of persistent inflation with weak economic growth and recession. Inflation does not necessarily boost the price of gold if real interest rates are also high. However, when real interest rates are low or negative (due to recession) and inflation is persistent, gold is extremely attractive as a safe harbor and inflation hedge. Contrary to most investors’ expectations, a serious recession or even depression is good for gold. Gold prices rose almost 75% during the Great Depression (from $20.67 per ounce to $35.00 per ounce) as the government engineered a dollar devaluation to cause inflation in all commodities as a way to defeat the prevalent deflation. That’s a good summary of where the U.S. economy is headed right now — inflation is still too high, but Fed policy will bring a recession, which will limit the Fed’s ability to raise rates. The final reason for higher gold prices involves the likely poor performance of other asset classes in the coming recession. Stocks may fall as much as 50% from already depressed levels. Real estate prices have already started to decline sharply. Cash will produce negative real returns while inflation persists. In that challenging investment environment, gold shines as an investor safe haven and reliable store of value. Don’t worry about the daily fluctuations; just focus on the big picture. And that picture is bright for gold. Why isn’t the dollar crashing given U.S. debt levels and fiscal profligacy? Read on to discover the secret of the great dollar paradox. Regards, Jim Rickards for The Daily Reckoning [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) P.S. NATO sends tanks to Ukraine… Russia prepares for a winter offensive… [Is this the beginning of World War III?]( [click here for more...]( I’ve just released an urgent message with my thoughts. But more importantly, I’m offering to send you an exact playbook on what I see playing out in the world and what you need to do to prepare. [Go here now for my brief but urgent message.]( [Over 62 And Collect Social Security? Take Action Immediately!]( [Click here for more...]( If you’re over the age of 62 and currently collect Social Security, you need to prepare now. Because Biden has given our country the worst inflation in decades – and many warn things will only get worse from here. Worse yet, the Social Security check you receive now may not keep pace with inflation… Which is why, if you don’t act now, you could fall behind in the months ahead. Is your retirement at immediate risk? [Click Here To Find Out]( The Daily Reckoning Presents: “The existing monetary system is over 50 years old, so the world is long overdue for a new monetary system”… ****************************** The Great Dollar Paradox By Jim Rickards [Jim Rickards] JIM RICKARDS The greatest paradox in foreign exchange markets today is the U.S. dollar (USD). U.S. fiscal responsibility is in ruins. The U.S. debt-to-GDP ratio stands at around 125%, among the highest in the world. The U.S. is experiencing soaring debt, reckless money printing and slowing growth. That sounds like a recipe for full-scale flight from the U.S. dollar. But that’s not happening. The dollar has gotten progressively stronger in recent times. The U.S. dollar index (DXY) has rallied from 89.64 on May 25, 2021, to 103.38 as of today. Other dollar indexes show comparable gains. How does the dollar soar in the face of fiscal and monetary failure and slowing growth? The Dollar Isn’t Just a National Currency The answer is that the U.S. dollar is more than just a national currency. It is the global reserve currency. It is used worldwide for trade, investment and payments, and it is created outside the U.S. in the form of eurodollars by U.S. and foreign banks operating in London, Frankfurt and Tokyo, among other money centers. The eurodollar market relies on dollar-denominated securities such as U.S. Treasury bills and notes for collateral in leveraged transactions. The dollar constitutes about 60% of global reserves, 80% of global payments and almost 100% of global oil transactions. European banks that make dollar-denominated loans to customers have to borrow dollars to fund those liabilities. But the U.S. not only controls the dollar itself. It also controls the dollar payments system. In short, the dollar has a life of its own independent of the Federal Reserve, the White House and the U.S. Congress. It’s the lifeblood of the international monetary system regardless of whether U.S. policymakers are reckless in fiscal and monetary policy or not. Banks need dollars to buy Treasury bills to pledge as collateral and keep the system afloat whether U.S. domestic policies are sound or not. How will the paradox of profligate fiscal and monetary policy by the U.S. and increased demand for U.S. dollars by international banks be resolved? In the short run, the paradox will not be resolved. I expect continued record deficits from the U.S. Congress and continued demand for dollars by highly leveraged international banks. Still, that condition is non-sustainable. Possible remedies include a new dose of fiscal responsibility in Congress (unlikely), direct Treasury intervention in foreign exchange markets to weaken the dollar (unlikely until it’s too late) or a global financial crisis that leads to major reforms in the international monetary system, possibly including a new Bretton Woods-style agreement. That kind of collapse followed by reform is the most likely outcome. It’ll happen because policymakers will have no other choice. Long Overdue for a New Monetary System My research has led me to one conclusion — we’re going to see the collapse of the international monetary system. When I say that, I specifically mean a collapse in confidence in paper currencies around the world. It’s not just the death of the dollar or the demise of the euro. It’s a collapse in confidence of all paper currencies. Over the past century, monetary systems have changed about every 30–40 years on average. The existing monetary system is over 50 years old, so the world is long overdue for a new monetary system. [Governors warn of “Biden Blackouts”]( [Click here for more...]( A former advisor to the CIA and Pentagon just made this dark prediction: Calamity Joe’s sabotage of the Nord Stream pipeline [His Evidence Here] was suicide. In the next 75 days, Americans will face fuel shortages… …widespread BLACKOUTS… …empty grocery shelves… …up to $1000 energy bills… …drained retirement accounts, and… …a massive crime wave. [Welcome To Biden's American Energy Armageddon]( When confidence is lost, central banks may have to revert to gold either as a benchmark or an actual gold standard to restore confidence. That wouldn’t be by choice. No central banker would ever willingly choose to go back on a gold standard. But in a scenario where there’s a total loss of confidence, they’ll likely have to go back to some form of a gold standard. Few remember that Nixon explicitly said that the suspension of gold convertibility by trading partners was being done “temporarily.” I spoke to two members of the Nixon administration, Paul Volcker and Kenneth Dam, who were with the president at Camp David the weekend the suspension was announced. They both confirmed to me that the intention was for the suspension to be temporary. The plan was to convene a new international monetary conference, devalue the dollar against gold and other currencies, primarily the Deutsche mark, Swiss franc and the Japanese yen and then return to the gold standard at the new exchange rates. The first part did happen. There was an international monetary conference in Washington, D.C., in December 1971. The dollar was devalued against gold (from $35.00 per ounce to $42.22 per ounce in stages) and other major currencies by about 10–17%, depending on the currency. Yet the second part never happened. There was never a return to a gold standard. While countries were negotiating the new official exchange rates, they also moved to floating exchange rates on international currency markets. The cat was out of the bag. Why Do Central Banks Cling to a “Barbarous Relic”? We’ve been living with floating exchange rates ever since. The creation of the euro in 1999 was a way to end currency wars among the European nations, but the EUR/USD currency wars continue. The temporary closing of the gold window by Nixon has become permanent, though it was only intended to be temporary... Still, gold is always lurking in the background. I consider gold a form of money rather than a commodity. Central banks and finance ministries around the world seem to agree, judging by the way they’ve been buying gold lately. Why would they be doing that if gold was just a barbarous relic? Reason forces you to conclude that gold still has a powerful role to play in the international monetary system with or without a gold standard. The timing of any financial crisis is always uncertain, but the probability of an eventual crisis is high. New signs of liquidity stress are emerging every day. But no investor should be surprised if the crisis happens sooner rather than later. Regards, Jim Rickards for The Daily Reckoning [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) P.S. NATO sends tanks to Ukraine… Russia prepares for a winter offensive… [Is this the beginning of World War III?]( [click here for more...]( I’ve just released an urgent message with my thoughts. But more importantly, I’m offering to send you an exact playbook on what I see playing out in the world and what you need to do to prepare. [Go here now for my brief but urgent message.]( Thank you for reading The Daily Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:feedback@dailyreckoning.com) [Jim Rickards] [James G. Rickards]( is the editor of Strategic Intelligence. He is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He is the author of The New York Times bestsellers Currency Wars and The Death of Money. [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2023 Paradigm Press, LLC. 808 Saint Paul Street, Baltimore MD 21202. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. To end your The Daily Reckoning e-mail subscription and associated external offers sent from The Daily Reckoning, feel free to [click here.]( Please note: the mailbox associated with this email address is not monitored, so do not reply to this message. We welcome comments or suggestions at feedback@dailyreckoning.com. This address is for feedback only. For questions about your account or to speak with customer service, [contact us here]( or call (844)-731-0984. 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